Global Witness celebrates significant agreement and shift in mind-set from the EU on investor due diligence

Thursday 7th March 2019 - The European Parliament and Council have
today reached a political agreement on a new set of rules requiring
European investors such as banks, pension funds and insurers, to carry out due diligence.

This means
investors will need to disclose the steps they have taken to address the
adverse impact of their investment decisions on people and planet.

The agreement,
which was reached in the early hours of this morning, also fundamentally
redefines the risks that investors must consider when decision making – moving
away from pure financial risk to their profits, and towards risks to human
rights and our global environment.

Global Witness, who
have been long campaigning for a more ethical and sustainable financial sector
in the EU, today celebrated the historic agreement.

The anti-corruption
NGO has previously
highlighted how Europeans’ money – and EU-based investors – far too
often play a key role in funding projects linked to human rights abuses, land
grabs and large-scale environmental destruction. They have highlighted examples
from oil exploration in Africa’s oldest national park to a mining project in
India which sparked violent protests.

Investors across
Europe play a powerful role in improving the overseas and European operations
of the companies they invest in. By using their significant leverage, they can insist
on higher environmental, social and governance standards in the companies and
projects they invest in.

Richard Gardiner, EU Campaigner, Global
Witness said:

“This agreement is
an important step forward in ensuring EU investors can no longer be blind to
the environmental and human rights abuses carried out by the companies they
invest in. It will lead to greater investor accountability and understanding of
the impact that investors have on climate change and human rights abuses.”

The NGO pointed
towards the recent Brumadinho dam burst in Brazil, which left over a hundred
people dead and hundreds missing. Following the disaster, Brazilian regulators
have ordered mining company Vale, who operated the dam, to suspend activity in
this and two more of its mines. On Friday Vale’s CEO also resigned.

This example makes it clear that voluntary mechanisms are not enough to tackle the corporate damage done to communities, and our environment, is no longer cost-free.
- Rachel Owens, Head of EU Advocacy, Global Witness

Rachel Owens, Head of EU Advocacy, Global Witness said:

“80% of investors
in Vale, the company at the heart of this devastating mining dam disaster, were
signed up to the UN’s Principles for Responsible Investing – but missed major
red flags such as concerns around the land
being secured illegally. The EU has today agreed to rules for investors to
ensure they no longer bankroll projects and companies who cause harm to people
and planet.”

"It is also especially encouraging to see pension funds in scope - which huge amounts of ordinary people's funds flow through.

“What's more, this
EU decision sets a global example for other governments to follow suit. For the
UK, to remain competitive in a post-Brexit landscape it must implement similar
or more stringent rules for investors.”

The rules still
however, the NGO said, have weaknesses.

On top of this, investors
will initially only be subject to a ‘comply or explain’ compliance mechanism,
although it will become mandatory for large investors after 18 months. This
means that investors themselves will need to determine whether they consider
the adverse impacts of the investment decisions or not.

‘There is a real
risk that investors intent on putting profit before people could continue to
ignore the substantial environmental, social and governance risks as regulators
will have fewer tools to challenge those investors that do not comply with the
rules. The Commission and Regulators must strictly enforce these rules, and
challenge those investors that do not comply, and do not satisfactorily justify
why their investments are not contributing to human rights or environmental
abuses. Only through strict enforcement can the goals of these rules be fully
achieved,” Owens confirmed.

The new rules are a
cornerstone of the EU’s Action Plan on Financing Sustainable Growth which was launched in March last year. The
EU is currently leading the way on ensuring finance is re-orientated towards
sustainable economic activity.

Rachel Owens, Head of EU Advocacy / Directrice du Plaidoyer (UE)

Notes to editor:

Visuals of Land and Environmental Defenders – the people at the sharp end of investment decisions gone wrong – can be found here.

Co-legislators
have agreed on the following in the Regulation:

Comply or Explain:
Investors themselves must decide whether they consider adverse impacts of
investment decisions on sustainability factors and that they will put in place
the relevant due diligence. If they not decide to comply then they must explain
the reasoning for not doing so. After 18 months of the application of this
regulation, this broad ‘comply or explain’ mechanism will be replaced with a
defined thresholds to decide which investors must comply with these rules.

Sustainability factors:
The regulation outlines the minimum factors that investors must take into
account as part of their due diligence policies, namely they must consider the
following factors: environmental, social and employee matters, respect for
human rights, anti-corruption and bribery matters. These will be further
developed for investors to be brought in line with the UN PRI Reporting
Framework – Main Definitions 2018.

Due Diligence policies:
The major development in this Regulation is that investors must have in place a
statement on their due diligence policies outlining how they consider the
adverse impacts of their investment decisions on sustainability factors. These
policies must be in adherence to existing responsible business conduct codes
and internationally-recognised standards for due diligence, namely the “OECD
(2017) Responsible business conduct for institutional investors: Key
considerations for due diligence”. They may also
disclose the degree of alignment with the long-term carbon emission reduction
goals of the Paris Climate Agreement.

Previous European Parliament position on regulation of the European Parliament and of the Council on disclosures relating to sustainable investments and sustainability risks and amending Directive (EU) 2016/2341, as agreed in the ECON Committee on 9 November 2018, can be downloaded here.

The Briefing ‘Indecent Exposure: How EU based investors and their subsidiaries are helping to bankroll human rights violations and environmental destruction’ can be downloaded here (PDF).

Global Witness Briefing ‘EU Investor Due Diligence: Ensuring finance works for people and planet’ from October 2018 can be downloaded here (PDF).

More information on the 2017 report on attacks on Land and Environmental defenders: ‘At What Cost?’ released in July 2018 can be found.

Global Witness investigates and campaigns to change the system by exposing the economic networks behind conflict, corruption and environmental destruction.